CFA 2011 Exam Q5

C

coolwalsky

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On the 2011 exam, Q 5 part C…it says she should have a lower allocation to equities because she is young and has a large amount of human capital relative to financial capital. I thought when you were young even though your human capital was high you would want a high portion in equities.
 
Equity like employment is the exception to the rule. Due to he high correlation between here employment income (bonus - being fired) and her PF returns it is deemed appropriate to put the PF in FI as the equities portion is covered by employment.
Other jobs, like teacher etc are unrelated to the stock market and thus deemed to be similar in nature to FI, hence the default of put the PF in equities.
Hope this help
 
They said list 2 reasons. 1 asnwer was here equity-like income, the other was her age.
 
I don’t understand the first answer, why she is yound and high large amount of human captial relative to financial capital could infer she needs lower allocation to equity?
 
I believe this is based on the idea that human capital is the PV of the earnings over the accumulation stage. Since she is young, there is a longer timeline for her to accumulate this capital therefore her human capital is high relative to her stated financial capital human + financial = total capital. While there is no real number here since earnings or discount rate are not given, I think it is one they want you to assume. If she was older human capital would be smaller calculated by PV based on remaining years. This isnt a perfect answer or question, but I believe it is what they are referencing. See pg 369 summary and pg 389 question 6 in book 2, they say opposite things but I think this is a reasonable take away.
 
i think because the question state that her intention to be equity-related job all her life.
so more her HC , more equity-like is included in her portfolio, so less allot to equity
 
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